Uniti sees a penny profit in 1Q, awaits news on Windstream bankruptcy

Uniti Corp. on Thursday (May 9) eked out a penny per share of profit in the first quarter as the Little Rock real estate investment trust awaits the outcome of Windstream Holding Inc.’s bankruptcy filing in late February.

During the first three months of 2019, Arkansas’ first publicly-traded REIT was able to close several key deals to strengthen and diversify the company’s portfolio and balance sheet, which is largely dependent on revenues from a four-year old master landlord-tenant agreement with Windstream.

For the period ended March 31, Uniti reported first quarter net income of $2.5 million, or one cent per share, compared to flat earnings of $1.2 million in the same period of 2018. Quarterly revenues rose 5.8% to $261 million, compared to $246.7 million a year earlier.

The former Communications Sales & Leasing (CS&L), which changed its name to Uniti more than two years ago, reported funds from operations (FFO) of $106.8 million, or 59 cents per share. Funds from operations is a closely watched measure in the REIT industry that takes net income and adds back items such as depreciation and amortization. Wall Street had expected Arkansas’ first publicly-held REIT to report fourth quarter earnings of three cents per share on revenue of $270.4 million, according to Thomson Reuters.

“Uniti continues to see strong demand for both dark fiber and small cell deployments, as well as new tower demand in the U.S., principally driven by the network densification efforts of wireless carriers in support of the broader rollout of evolving communication infrastructure technologies and architectures,” said Uniti President and CEO Kenny Gunderman. “We continue to expect to see solid organic revenue growth across our full-suite of product and service offerings as Uniti Leasing, Uniti Fiber, and Uniti Towers will be significant beneficiaries of industry dynamics over the next several years. As a result, we are largely leaving our full year 2019 outlook unchanged.”

Uniti entered into a partnership in early January with the MIP subsidiary of United Kingdom’s Macquarie Infrastructure and Real Assets to acquire Bluebird Network LLC, which holds nearly 178,000 fiber strand miles in the Midwest across Missouri, Kansas, Illinois, and Oklahoma. In the transaction, Uniti has agreed to purchase the Bluebird fiber network, and MIP will purchase the Bluebird’s operations.

As part of that deal, Uniti also agreed to sell its Midwest operations to MIP, while Uniti will retain its existing Midwest fiber network. After the deal closes, Uniti will lease the Bluebird fiber network and its Midwest fiber network to MIP under a 20-year triple net lease with initial annual cash rent of $20.3 million, which represents a cash yield of 9.6%.

Uniti said it is acquiring the fiber network of Bluebird for $319 million, split between cash and pre-paid rent received from MIP at closing. That deal is expected to close in the third quarter of 2019, subject to regulatory and other closing conditions.

In late February, Uniti announced another deal to sell its Latin American tower portfolio to an entity controlled by Phoenix Tower International (PTI) for $100 million in cash. PTI will acquire approximately 500 towers located across Mexico, Colombia and Nicaragua. Uniti closed that deal in early April.

Earlier this year, Uniti said it received a limited waiver from its lenders under the company’s $750 million credit line, which had approximately $38 million of unrestricted cash and $110 million of undrawn borrowing availability at the end of fiscal 2018. At the end of the first quarter, Uniti said it had nearly $106 million of unrestricted cash and cash equivalents and undrawn borrowing availability under its revolving credit agreement.

Uniti said the waiver was received after the Little Rock real estate landlord received a “going concern opinion” from auditor PricewaterhouseCoopers (PWC) on Dec. 31, 2018. According to a 10K filing with the federal Securities and Exchange Commission, the PWC audit “expressed substantial doubt as to whether [Uniti] could continue as a going concern within one year after the date the financial statements are issued as a result of Windstream’s bankruptcy petition and the bankruptcy’s uncertain effects on the Master Lease.”

“While the outcome is uncertain, we expect Windstream will continue to perform on the Master Lease and believe the probability of Windstream rejecting the lease in bankruptcy to be remote because the Master Lease is central to Windstream’s operations,” Uniti said in the SEC filing. “We intend to reduce our capital expenditures and dividend as well as seek external funding in order to sustain our operations. If we do not succeed in raising such funds and reducing such expenditures and if Windstream elects to reject the Master Lease, we could experience a material adverse effect on our business and our stockholders may lose some or all of their investment in us.”

Uniti also noted in the securities filing that there are no assurances that Windstream will have sufficient assets, income and access to financing to satisfy its landlord-tenant obligations under the master lease agreement, which provides the Little Rock REIT with 60% of its annual revenues.

Windstream first announced in late February that its holding company and subsidiary, Windstream Services LLC, had filed voluntary petitions for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York. That default was precipitated by a Feb. 15 court ruling by U.S. District Judge Jesse Furman for the Southern District of New York that Windstream violated bond agreements after splitting off Arkansas’ Uniti in April 2015.

Windstream has not yet reported its first quarter earnings for fiscal 2019. A federal bankruptcy court judge in New York has scheduled a May 14 hearing to consider Windstream Holding’s request for $20.1 million in bonuses to retain five “key” executives to steer the company through its Chapter 11 reorganization.

Uniti said it is still updating its 2019 earnings forecast due to the impact of the change in accounting for the company’s master lease agreement with Windstream.

“Our 2019 outlook assumes the Windstream lease continues in full force and effect, and that Windstream continues to make all lease payments on time,” said the Little Rock-based REIT. “All other expectations are generally consistent with the guidance presented in our fourth quarter and full year 2019 earnings release, dated March 20, 2019. “

At the close of business on the Nasdaq stock exchange, Uniti stock was up six cents to $11.26 per share. Over the past 52 weeks, the Arkansas telecom REIT’s shares have traded in the range of $8.06 as a low and $23.42 as a high.